What is the Dow Jones Industrial Average?

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What is the Dow Jones Industrial Average?

Dow Jones Industrial Average

Dow Jones Industrial Average

The Dow Jones is basically a stock of 30 companies that represent the U.S. economy. It was started by Charles Dow (in 1896) with fellow journalist Edward Jones (fun fact, they also started the Wall Street Journal). Hence the index name Charles Dow and Edward Jones.

It’s a 30-component index, or grouping of stocks, that’s kind of meant to be an indication of “how the market is doing“. This basket of stocks will cover stocks from all different industries from telecom, to industrials, to tech and finance, and it’s going to include some of the world’s most influential and established companies. Companies such as Bank of America, Procter & Gamble, Walmart, Apple, and McDonald’s.

This index was created by the Dow Jones co-founder, Charles Dow in the 1800s and it’s changed a lot since its original formulation, and we’ve seen companies come and go from the Dow, right now, General Electric is the “Dow Veteran” it’s been in the Dow longer than any other components. Some of the “young ones” are, Cisco or Travelers, which were added after Citigroup and General Motors were booted from the Dow.

This regular readjustment, keeps the Dow relevant and it makes sure the Dow continues to be a benchmark for what the overall market is doing. Many investors will use the Dow Jones as a benchmark, because there is a lot of ways you can invest passively in the Dow Jones. As investors, we’re always trying to be our given benchmark. The Dow Jones is one of the most popular ones.

Charles Dow - Edward Jones

Charles Dow – Edward Jones, creators of the Dow Jones Industrial Average

The Dow is a price weighted index, which means that some of the components are at very expensive share prices, they are going to have an outsized weighting on the index and by nature, also kind of excludes some companies that are very influential in the market as a whole, but who share prices are simply too expensive, companies like Apple and Google at current share prices are basically omitted from the Dow-

But the Dow Jones is one of the most traditional classic measures of “how the market is doing” and you’ll see a reference every day, and still is a reasonable gauge for market performance on a day to day basis.

 

What companies make up the Dow Jones Industrial Average?

 

Dow Jones initial companies (back in 1896):

American Cotton Oil

American Sugar

American Tobacco

Chicago Gas

Distilling & Cattle

Feeding

General Electric

Laclede Gas

National Lead

North American

Tennessee Coal & Iron

U.S. Leather

U.S. Rubber

Utility

 

Here are the current 30 components of the Dow Jones Industrial Average:

American Express Co – AXP

Apple Inc – AAPL

Boeing Co – BA

Caterpillar Inc – CAT

Cisco Systems Inc – CSCO

Chevron Corp – CVX

Exxon Mobil Corp – XOM

General Electric Co – GE

Goldman Sachs Group Inc – GS

Home Depot Inc – HD

International Business Machines Corp – IBM

Intel Corp – INTC

Johnson & Johnson – JNJ

Coca-Cola Co – KO

JPMorgan Chase & Co – JPM

McDonald’s Corp – MCD

3M Co – MMM

Merck & Co Inc – MRK

Microsoft Corp – MSFT

Nike Inc – NKE

Pfizer Inc – PFE

Procter & Gamble Co – PG

Travelers Companies Inc – TRV

UnitedHealth Group Inc – UNH

United Technologies Corp – UTX

Verizon Communications Inc – VZ

Visa Inc – V

Wal-Mart – WMT

Walt Disney Co – DIS

DowDuPont Inc – DWDP

How is the Dow Jones Industrial Average calculated?

 

There are 30 stocks in the Dow, we add up the 30 prices of the individual stocks and then divide it by the so called “Dow Jones Divisor” (which, by the way is: 0.14602128…), and that gives us the Dow Jones Industrial Average.

American Tobacco: Dow Jones Industrial Average

American Tobacco one of the initial companies of the Dow Jones Industrial Average

So it’s a price weighted index, which means that any of the 30 companies in the index, every time one of them moves 1 dollar in value, they each have the same impact on the value of the index regardless of how big a company it is, and this is in shock contrast to the market capitalization weighted indexes like the S&P 500.

So, the market capitalization weighted index is really make more sense, people today look at the S&P 500 as a real indicator of the market versus the Dow Jones Industrial Average, but the fact is that the Dow has been around for a long time and people still look to it as an indicator of the market, but, we have to remark that the market capitalization weighted indexes are a little more representative of what’s really going on.

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